Closed ECB cuts rates – as it happened

The ECB has cut rates further into negative territory as it seeks to stimulate the eurozone amid the global economic downturn.

Mario Draghi has unveiled a whole host of new measures in response to the slowdown in growth in emerging markets and the sharp fall in the oil price.

Key developments

  • Headline deposit rate cut by 10 basis points to -0.40%

  • The asset purchase programme increased from €60bn to €80bn

  • Scope of QE expanded to include non-bank corporate bonds issued in eurozone

  • A new series of targeted longer-term refinancing operations aimed at providing cheap liquidity

  • GDP and inflation forecasts revised down:

  • GDP: 1.4% in 2016, 1.7% in 2017 and 1.8% in 2018

  • Inflation: 0.1% in 2016, 1.3% in 2017 and 1.6% in 2018

  • By Emily Cadman and Mark Odell


Welcome to our live coverage of the European Central Bank’s rate decision. Mario Draghi faces a daunting task as the central bank is expected to make a fresh effort to bolster the eurozone’s lacklustre recovery.


Anticipation in the markets that Draghi will announce some new form of stimulus has reached fever pitch. While most analysts are predicting some variation of either more quantitative easing or some further cut in rates, there are actually a wide variety of options.

This chart (courtesy of UBS) sets out the landscape:


But with expectations at what the central bank will do very high (my inbox is full of analysts predicting cuts of between 10bp and 20bp at the very least) there is the possibility that whatever is announced underwhelms. That means the central bank can only engineer further euro weakness (not that the exchange rate is an explicit target) by going the extra mile.


There are plenty of doubters around who think that central banks are running out of ammunition. The eurozone’s lacklustre recovery was underlined by recent data that showed it fell back into deflation in February.


The FT’s Frankfurt bureau chief, Claire Jones, spells out in this piece the size of the challenge facing Mr Draghi


Less talked about by commentators in advance (but of vital interest to economists) will be the updated projections for growth and inflation in the eurozone.

While markets have been exceptionally volatile this year, leading economists have warned earlier this week that they have been too quick to believe the worst.

In a call for a “reality check”, Olivier Blanchard, former chief economist of the International Monetary Fund, and his colleagues at the Peterson Institute of International Economics say that global economic pessimism in 2016 has been in contravention of basic economic facts.

Full story


The markets are perhaps unsurprisingly not doing a lot before the rate decision is announced, expectations are for a cut of between 10 and 20 basis points, from the current deposit rate of -0.30%. Jamie Chisholm, the FT’s Global Markets Commentator, has them collectively keeping their powder dry . . . or perhaps they are holding their breath.


And here’s a reminder from Roger Blitz, the FT’s currencies correspondent, what happened to the euro after the ECB’s December meeting, which didn’t go down very well


For all the focus on technicalities its worth not losing sight of the big picture of what Draghi is trying to achieve: boosting the eurozone’s lacklustre recovery.

The dangers of inflation expectations – in the jargon – becoming “de-anchored” is that if individuals do not believe monetary policymakers can raise inflation, then they are less likely to demand higher wages.

The other real test is how to ensure that the real economy feels the benefit of any stimulus activity:

Neil Williams Hermes chief economist, in a note to clients today put it succinctly

“ECB QE provides cash to lend, but it cannot force consumers & firms to borrow”


With expectations that the ECB will push rates further into negative territory – that decision is expected in the next few minutes – here is a cautionary tale from earlier this week from economists at the Bank for International Settlements


One bright spot in the eurozone is Ireland, which released its GPD figures for the fourth quarter showing a whopping 9.2 per cent growth rate, the highest since the first quarter of 2001


Emoticon And here we go:

At today’s meeting the Governing Council of the ECB took the following monetary policy decisions:
(1) The interest rate on the main refinancing operations of the Eurosystem will be decreased by 5 basis points to 0.00%, starting from the operation to be settled on 16 March 2016.

(2) The interest rate on the marginal lending facility will be decreased by 5 basis points to 0.25%, with effect from 16 March 2016.

(3) The interest rate on the deposit facility will be decreased by 10 basis points to -0.40%, with effect from 16 March 2016.

(4) The monthly purchases under the asset purchase programme will be expanded to €80 billion starting in April.

(5) Investment grade euro-denominated bonds issued by non-bank corporations established in the euro area will be included in the list of assets that are eligible for regular purchases.

(6) A new series of four targeted longer-term refinancing operations (TLTRO II), each with a maturity of four years, will be launched, starting in June 2016. Borrowing conditions in these operations can be as low as the interest rate on the deposit facility.


The markets are just digesting the details now but this is far bigger than most expectations.


Draghi has over-delivered on most pre-meeting expectations.

Alongside the expected cuts to a series of key interest rates, non-bank corporate bonds will now be included in a larger asset purchase programme.

Additionally a new series of four targeted longer-term refinancing operations (TLTRO II), each with a maturity of four years, will be launched.


With such a large package of measures one of the inevitable questions at the upcoming press conference will be: was it unanimous?


FastFT has a quick market reaction piece here

The euro has fallen by 1.1 per cent against the dollar to below $1.09

Bonds: Yields on benchmark 10-year bonds across the eurozone have moved lower following the decision. The yield on the 10-year German Bund dropped 4.1 basis points on the day to 0.197 per cent, but it has since pulled back.


Here’s one view of Draghi’s move

https://twitter.com/alaidi/status/707912837302259714


We’ve now started to get the first round of quick take reaction from the markets:

Claus Vistesen, Chief Eurozone Economist at Pantheon Macroeconomics:

“We see this response as significantly more aggressive than the consensus expected.

[At the press conference] attention will focus on which private-sector bonds the ECB will buy, and whether it will actually paybanks to bid for funds in the new TLTRO rounds”


The general consensus is that Draghi has reached for one of these:


Ken Wattret, Co-Head of European Market Economics, at BNP Paribas

The press conference is going to be very important as there are numerous details and potential extras which will likely influence the markets’ ultimate reaction.

He notes in particular the details of which assets will be included “shows a willingness to widen the range of assets it will purchase.”

Mr Wattret points out that the press release states “non-bank corporations” and there is a large pool of assets which are classified as financial but which are not defined as banks – “again we need more colour on this”.


And from the FT’s Elaine Moore in the capital markets where not everyone is pleased:

Investors in global bond markets seem disappointed that the ECB has only cut its deposit rate by 10 basis points. Prices in benchmark 10 year US, UK and German bonds are falling, sending yields higher


And from the FT’s Roger Blitz who has been watching the currency markets:

After falling 1.2 per cent following the announcement, the euro held at around $1.0870, but has begun another dip lower to around $1.0830. That’s close to the low of March 2.

The euro is also 1.1 per cent lower against sterling


In terms of the details of what bonds will be purchased we will have to wait for the press conference.

The ECB has tweeted the following:

“Investment grade euro-denominated bonds issued by non-bank corporations will be included in the list of assets for regular purchases.”


The main stock markets in the eurozone are surging after the ECB’s decision:
Euro Stoxx 50 up 3.5%
France’s CAC 40 up 3.%
Germany’s DAX up 2.4%
Italy’s FTSE MIB up 3.5%

while in London the FTSE100 is in mildly positive territory, up 0.6%


Aberdeen Asset Management Investment Manager Patrick O’Donnell:

“We’ll have to wait until the press conference for the full details but this has all the hallmarks of the ECB having thrown the kitchen sink at the problem. The big surprise is that the ECB is going to start buying non-financial corporate bonds. But the overall package is getting a good reaction from stock markets and the euro is already down. It remains to be seen how long the rally will last.”


Shares in Eurozone banks are also in full rally mode:

Deutsche Bank +6.5%
Commerzbank +4.9%
Société Générale +5.4%
UniCredit +8.2%
Santander +5.5%


The first take on the decision by the FT’s Claire Jones is now our splash on FT.com. Here are the top two pars:

The European Central Bank has unveiled a series of new measures to strengthen the eurozone’s recovery, with policy makers expanding their quantitative easing package and cutting benchmark interest rates to a new low.

The ECB has raised the amount of bonds the eurozone’s central bankers buy each month under QE from €60bn to €80bn — a greater amount than many analysts had expected. It also expanded the range of assets it will buy to include corporate bonds.

Read the rest of the piece here


Just re reminder that Draghi’s press conference is due to start at 13:30GMT/14:30CET


From Roger Blitz on the currency markets in a reminder of the wider central bank ramifications:

Will the ECB announcements prompt other European central banks to respond? The euro is 0.7 per cent lower against the Norwegian krone, and 0.5 per cent lower against the Swedish krone. But it’s down only 0.3 per cent against the Swiss franc.


We are waiting for Draghi now… two minutes late


Looks like Draghi is running a bit late but he’s on his way now . . .


And we are up… opening statement beginning


A slight smile from Draghi as he starts.

“This comprehensive package” has been designed to “further ease financial” conditions and stimulate credit growth he says – as well as accelerating the return of inflation.


So far just listing the measures taken. No additional detail as of yet.


Here we go:

Counter parties will be able to borrow up to 30% of the stock of eligible loans as of Jan. The rate will be fixed for the life of the operation.


The main rates will remain at current or lower rates for a “considerable time” Draghi says.

Additional details of the new financing operations will be published at 2.30 GMT (i.e post press conference)


And we are onto the econ analysis:

“We expect the economic recovery to proceed at a moderate pace”, Draghi says, adding that the monetary measures taken today will support growth. Low price of oil will provide “additional support” to incomes.


Here are the macro projections.

GDP: 1.4% 2016, 1.7% 2017, 1.8% 2018


Inflation will pick up towards the end of the year, Draghi says, after a few more months in negative territory:

Inflation: 0.1% 2016, 1.3% 2017, 1.6% 2018

Downward revisions there


So both inflation and GDP have been revised down.

Dovish on inflation: still below the 2 target two years out even with the impact of today’s raft of stimulus measures.


The ECB has just published Draghi’s introductory comments here


Draghi makes his familiar call for structural reforms (such as raising productivity and improving infrastructure) to reap the full benefits of the loose monetary policy.

No surprise when he says more action is needed in many eurozone countries.


Here’s Draghi’s comment on the downward revision for inflation:

In comparison with the December 2015 Eurosystem staff macroeconomic projections, the outlook for HICP inflation has been revised down, mainly reflecting the fall in oil prices over recent months.


And now it’s over to questions


Some quick thoughts on the euro’s fall via the FT’s Roger Blitz, who says the euro is hitting new lows, hitting $1.0820, a level last touched on February 1:

“The policy divergence trade, in our view, is beginning to develop legs once again and the ECB has certainly done its part today” – CitiFX

“The euro’s sell-off is the biggest since November. At the start of Draghi’s press conference the euro slipped through last week’s low near $1.0825. A break of $1.08 would signal a test on $1.0750 and then $1.0710 the low from the start of the year.” – Marc Chandler, Brown Brothers Harriman


So first Draghi gives an overview of the TLTRO:

- 4 operations, one each quarter starting June 2016
- Maturing of the operations will be 4 years each. Last one will mature in March 2021
- Rates will be set by the main rate at the time of bidding. “They may get a reduction on that rate” depending on the loans they grant. Lowest will be the deposit rate (i.e -0.4% at the moment)
- Amount they can borrow will depend on the amount of loans on their balance sheet – i.e those that lend more can borrow more


Draghi repeats his guidance on rates:

“Rates will stay low for a long period of time and well past the horizon of our purchases”

But adds “We don’t expect it to be necessary to reduce rates further” BUT that facts can change…


More from Draghi on one part of the first question “how low can you go?”

Does it mean we can go as low as we want without having an impact on the banking system, the answer is no


Draghi says they discussed tiering of rates, but decided against it.

The governing council is “increasingly aware of the complexities” of negative rates he says – in a nod to increasing complaints from banks about the impact of negative rates on their businesses.


But he guides that the focus is likely to shift from negative rates towards other non-conventional instruments.

i.e expect more QE not more rate cutting


Another way to express Draghi’s comments on how low the ECB can go:

https://twitter.com/mhewson_CMC/status/707928551912296450


Senior bankers told the FT earlier this week why they don’t like negative rates. Here’s an excerpt:

Bank leaders are alarmed by the crippling effect on their profits of negative rates which they cannot pass on to ordinary customers, adding to concerns about the fragility of financial stability in some parts of the eurozone.

But any attempt by the ECB to shield lenders from the effects of negative rates could weaken the policy and open the central bank to claims that it is engaged in a beggar-thy-neighbour devaluation.

Andreas Treichl, chief executive of Austria’s Erste Bank, told the Financial Times that another cut could encourage financial bubbles, hurt economic growth and create “social disparity” by penalising savers.

José García Cantera, Santander’s chief financial officer, added that the banks that would take the biggest hit to their profits if rates were cut again were those least able to bear it.

The full story can be read here


Draghi is pushed precisely on what assets can be purchased under the TLTRO programme – precisely how will non-bank be defined.

Committees will look into the specific definition of the companies that are eligible, he says.


More from the markets via Roger Blitz

Market nerves are pretty obvious. The euro had a big rebound to $1.0960, which appeared to have coincided with Draghi talking about the limitations of QE. It’s now off 0.7 per cent on the day.


And now the FT’s Claire Jones:

First: What does Draghi mean by “synergies” between the policy measures.

“All of these actions [listing the various announced metrics] complement each other in making financial conditions easier,” Mr Draghi says.

“We do expect substantially easier financing conditions.”


More from our colleagues at FastFT:

Toby Nangle Head of Multi-Asset EMEA at Columbia Threadneedle Investments called the move to buy investment grade corporate bonds “the most important aspect” of the ECB decision.

He said the move is “in keeping with the central bank’s ambition to cheapen funding costs for companies that seek to invest, and reduce the incentives to save rather than spend,” and added:

“This decision gives the ECB the potential to become the most significant participant in the €900bn European non-financial corporate bond market”.

A line on credit market’s reaction to the corporate bond move:

The cost of insuring eurozone corporate bonds against default has dropped sharply after the ECB unveiled plans to buy corporate bonds.

The iTraxx index compiled by Markit, which tracks investment grade credit default swaps, is on course for its largest one-day drop in at least a year. The index has dropped 11.5 basis points to a low for the year of 81bps.


Draghi is now being asked about whether the decision was overwhelming – and Jens Weidmann, the German member’s absence from the meeting due to the scheduled rotation.

“The majority in favour was overwhelming,” says Draghi.

Not unanimous in other words.


Currency traders are not entirely happy.

The single currency not only reversed its losses but moved a full 1 per cent higher, to trade at £1.11.
It’s come back to $1.1060, but the FX market has just had a big euro wobble


Well, this isn’t going to plan.

The euro slide has just gone into reverse and it’s now up on the US dollar. More from FastFT:

It started so well. An expectations-busting package of easing measures, plus an exceptionally generous package to encourage banks to lend to the real economy, sent the euro plunging earlier today.

Now, believe it or not, it’s 1.05 per cent higher on the day, at $1.1106, after ECB chief Mario Draghi said he sees no reason to cut rates further.

Stay tuned and keep your tin hats on…


The non-eurozone European currencies have lost ground against the US dollar:

The Swedish krona: -1%
The Danish krona: -1.2%
The Swiss franc: -0.8%
The British sterling: -0.5%
The Hungarian forint: -1.3%
The Czech koruna: -1%
The Polish zloty: -0.7%


The next question for Draghi is simple: What more does the ECB have left in the tank?

Draghi strongly pushes back against the idea central banks are out of options.

“We have shown we are not short of ammunition,” he says, pointing to the range of measures announced today.


“It would be foolish to think” that we get back to inflation at 2% “with an economy that hasn’t recovered get”, Draghi says, defending the slow progress in getting back anywhere close to target.

First, the recovery needs to be solid, he says, adding that wages need to start rising.


The FT’s currency correspondent, Roger Blitz, is glued to his screens. He points out that the euro has come back to $1.1060 after hitting $1.11, declaring:

The FX market has just had a big euro wobble


This could be fun: is helicopter money next, Draghi is asked.

“We haven’t really thought or talked about helicopter money,” Draghi says.

But he adds it is a “very interesting concept”.

That’s certainly not a never never pushback.


And the last question of a pretty packed press conference…

Are we in deflation?

“No. We are not in deflation.”

“Our monetary policy measures will anchor inflation expectations.”

Though he admits that the time taking to get back to objective is “longer than it was”. He specifically says that the situation is different to Japan in the 1990s.


That’s us. We’ll be here with a summary in a moment


The ECB has released details of some of the new measures announced today. The TLTRO details are here


. . . and the details of the expansion of QE to non-bank corporate bonds issued in the eurozone is here


Along with the reverse of the euro against the dollar, European banking stocks have also done a u-turn after initial gains earlier. This from FastFT:

European banking stocks have fallen by 2 per cent since Mario Draghi, governor of the European Central Bank, said he had no plans to cut interest rates further during the central bank’s press conference, which is still taking place.

European banks’ share prices initially shot up by the most since the end of the eurozone crisis in 2011, after the ECB unleashed a bigger-than-expected package of measures to further boost the bloc’s economy, write Gavin Jackson and Thomas Hale.

However banking stocks later pared gains and the euro appreciated, following remarks that Mr Draghi made in his press conference.

The Stoxx 600 banking subindex is now down 2 per cent at publication time, having increased by 7 per cent earlier.


Here’s the chart of the big euro wobble:


So what have we learnt from today?

Well Draghi came out all guns blazing and initially surprised the markets with a much bigger than anticipated package designed to refute suggests central banks are out of ammunition.

While all of the main rates were cut, Draghi was very cautious about the prospect of any further rate cuts. This caused a reversal in the euros fall, as many FX participants interpreted this as putting a floor on rates.

The asset purchase programme will be expanded both in terms of the value of purchases, but also to include investment grade non-bank corporate bonds. Further technical details of precisely how this will operate will be available later today.

That’s it from me and Mark. Thanks all for joining us and the helpful comments!